Should central banks target anything other than inflation (such as money supply)?
By: Patrick Minford, Cardiff Business School Before answering this question it is useful to take a look at the two main environments for monetary policy in the past 30 years. The first is one- I have in mind the 1970s and early 1980s- when there is high and variable inflation and there is general scepticism among the general public backed up by hostility among the well-informed (the ‘chattering classes’) to the idea that monetary policy can control inflation. Instead political opinion holds it that controls on wages and prices should be used to hold down inflation and monetary and fiscal policy should accommodate to that resulting inflation rate, at pressures that maintain full employment. The first environment is one where monetary tightening has ‘no credibility’ as regards to its capacity to reduce inflation more than temporarily. People in the markets- be they workers, investors or consumers- will expect the tightness to be ended as soon as unemployment starts to rise beyond some lo
